China: Still High Risk, High Reward

Economist Cliff Waldman discussed the continuing risks and opportunities for doing business in the world’s fastest growing economy.

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In a fast-paced presentation at today’s Manufacturing Perspectives media event at Automation Fair, Cliff Waldman, global economist for the Manufacturers Alliance/MAPI, a business research group, presented his evaluation of China’s economic prospects with a short-term outlook and a speculative look at the country’s longer-term dynamic.

His analysis argues that high-reward, high-risk scenario remains firmly in place for American companies in China.

Waldman believes the impact of rising wages in China as a result of rising education levels and continued migration of younger workers to the more developed regions, means that the original attraction of foreign investment due to cheap labor is officially over. “Wage acceleration is part of a broader trend that suggests that China will no longer be the low-cost competitor in Asia,” he stated.

Waldman frets about an investment bubble that is unlikely to sustain itself given noticeable reduction in new construction. Waldman believes that spending on the 2009 Olympics is masking some weaknesses in overall investment, but that the Chinese consumer currently plays a larger role in the economic engine than previously thought.

But he said, “Declining savings rates and labor supply will likely have a negative impact on capital flows and foreign direct investment.”

“China has the appropriate laws to control the intellectual property problem, but enforcement is something else.” Economist Cliff Waldman discussed the continuing risks and opportunities for doing business in the world’s fastest growing economy.
Waldman points out that China’s continuing large trade surplus has much more impact on economic growth in the rest of Asia than it does in threatening North American and European manufacturers, although there’s clear growth in the export of machinery and transport equipment to those regions.

“Fair value in exchange rates has a long way to go yet,” said Waldman, but he believes that “Asia finally is participating in appropriate movement towards a more stable currency environment.”

For American companies, Waldman believes the opportunities are greatest in environmental technology development and implementation, in medical technology development to support what is becoming a fast-aging society. “China might actually grow old, before it grows rich,” speculated Waldman.

Other opportunities for American companies include investment in R&D on sophisticated infrastructure such as computers and energy as China’s middle class and consumer base continues to grow.

And then there are the risks, reminded Waldman. Those environmental and health issues include those of an aging society and, one can infer from Waldman’s remarks, a governmental structure that might resist those changes. Costs are rising everywhere, and intellectual property concerns are still very real. “China has the appropriate laws to control the intellectual property problem,” said Waldman. “Enforcement is something else.”

Finally Waldman reminded the audience that with the type of rapid societal change that defines China today, the risk and concerns about social and political issues are not to be taken lightly.

“The Chinese consumer has the potential to be a major force in the global economy,” concluded Waldman. “But the full potential of the household sector will not be realized until China rebalances away from excessive investment growth, which will occur during a period of slower economic growth. Thus China’s long-term economic growth potential will likely slow.”

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